Q: What Are the Different Types of Payroll Deductions?

Payroll deductions are money taken from an employee’s paycheck to pay for taxes, benefits, or other fees.

There are three main types of payroll deductions:

  • Pre-tax deductions and contributions
  • Local, state, and federal taxes
  • Post-tax deductions and contributions

Here’s a quick breakdown of the different types of payroll deductions and how they work:

1. Pre-tax deductions

A pre-tax deduction is money that is taken out of your employee’s gross pay before any taxes are withheld from their paycheck.

Pre-tax deductions reduce an employee’s taxable income, which means they will likely owe less income tax and/or FICA tax (which includes Social Security and Medicare).

Pre-tax deductions can also lower employer-paid taxes, like FUTA (the Federal Unemployment Tax), FICA, and SUI.

Not all pre-tax deductions are the same. Some deductions are considered pre-tax for all taxes, while others may still require certain taxes to be withheld.

Common pre-tax deductions/contributions include:

  • Retirement funds. Contributions to some retirement funds like a traditional 401(k) can be a pre-tax deduction.
  • Health insurance. Health benefits, like health insurance or FSA or HSA plans, may allow pre-tax deductions. If your employee pays for health insurance through a health plan offered at your company, then those contributions could be pre-tax.
  • Commuter benefits. Some commuter benefits are eligible to be pre-tax deductions, within certain limitations.

2. Employee withholding taxes

Federal, state, and some local taxes are withheld from an employee’s pay on each paycheck. These can include:

  • Federal income tax
  • State income tax (in states with income tax)
  • Any applicable local taxes at the city, county, or municipality level
  • Employee’s share of FICA (Medicare and Social Security taxes)

3. Post-tax deductions

A post-tax deduction is money that is taken out of your employee’s paycheck after all applicable taxes have been withheld.

Common post-tax deductions include:

  • Retirement funds. Some retirement funds are post-tax, like a Roth 401(k).
  • Wage garnishments. If your employee is subject to court-ordered garnishments, then those funds will be removed after their taxes have been withheld.

For an example of where payroll deductions appear on paychecks, watch the video below:

Remember, you don’t have to calculate all this information on your own. Calculating a paycheck can get tricky, so it’s always best to consult a CPA or use a payroll provider to make sure everything is deducted correctly.

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